Four ways CalPERS could reach $13bn in PE deployment

As the pension discusses the final plan for its revamped PE programme, we look at how it can hit its target annual deployment range, including through secondaries opportunities.

The California Public Employees’ Retirement System‘s plans to revamp its private equity programme could mean it deploys as much as $13 billion per year in private equity, according to documents prepared for the pension’s June investment committee.

That figure and the means by which CalPERS will position itself for the future are up for discussion by its board on Tuesday. The Sacramento-based pension was underweight private equity during the fiscal year ending 30 June, committing $5.3 billion against a $6 billion target, according to documents prepared by Meketa for the review.

For CalPERS, the challenge is how to deploy capital in a steady and responsible manner in order to meet the desired allocation and best returns.

Here are four ways the US’s largest public pension can deploy $10 billion-$13 billion annually.

1. Mega, mega-funds

Fund commitments made up 72 percent of CalPERS’ exposure to the asset class as of 30 June, of which mega and large buyouts represented 55 percent by value.

CalPERS committed to 18 funds in the current fiscal year, according to its semi-annual report. Its biggest commitment was $600 million to Carlyle Group’s seventh buyout fund, which closed on $18.5 billion in July this year. Bridgepoint VI received a $521 million commitment while Onex Partners V, Blackstone Tactical Opportunities III and TPG Partners VIII took $500 million each.

The pension is reducing its GP relationships from more than 400 in 2015 to a target of only 100 by 2020 and is forming large accounts with only the best performing and most trusted managers.

2. Finding next-gen managers

CalPERS has been investing between $10 million and $35 million in emerging managers for the last 25 years directly and through funds of funds.

CalPERS CIO Ted Eliopoulous noted at its June investment committee meeting that the pension needed to expand the amount of capital within its Emerging Manager programme and beef up co-investment capabilities with its fund of funds managers.

3. Partnership model

CalPERS wants to add new partnership structures that will include having a deeper and stronger co-investment capability, being able to invest in secondaries opportunities as well as creating separate account relationships, according to its revamped PE policy.

The pension began legwork on the secondaries front in July, putting out a call for proposals for between five and 10 law firms to advise it in “work-out” situations in older funds.

Accessing new talent and expertise is also an outcome CalPERS wants under the partnership model. Eliopoulos said CalPERS is on the lookout for new firms and new talent spinning out of established managers experiencing succession.

4. Direct investing becomes a reality

CalPERS’ interest in direct investing comes at time when its peers are planning extensive in-house teams to cover private equity.

This proposed unit would enable CalPERS to invest in companies directly without the involvement of fee-collecting GPs.

The pension has already identified two segments of the market to focus on: innovation and multi-generational/long duration investments in the core economy. The innovation segment focuses on late-stage venture capital deals in technology, life sciences and healthcare.

“We really believe that the private equity marketplace is set for some disruption and change over the next decade,” Eliopoulos said in June.

He acknowledged that the pension’s PE programme is “rooted in the selection of external GPs, which means that the programme, its team, systems and methods are all geared towards performing the function of selecting external GPs”.

Private equity made up 7.7 percent of CalPERS’ approximately $360 billion portfolio, against an 8 percent policy target allocation.

Its PE programme generated a one-year net total return of 16.1 percent, below its policy benchmark return of 18.6 percent for the period. The programme’s three-year, five-year and 10-year net returns also did not meet the policy benchmark.

This article was amended to show that Tuesday’s discussion on private equity is the review of the programme held annually in November.